Interview Martin Redrado, former President of the Central Bank of Argentina

Martin Redrado, former President of the Central Bank of Argentina

“We have been highly complacent with the solid cycle of raw materials”

The World Bank economist warns that the good commodity prices that have brought growth will not lead to improvements in productivity, competitiveness or the structural reforms that could strengthen the standing of the region on the global stage. And copper? “Prices from the past will not return” he contends.

From his current position as Senior Economic Advisor for the World Bank, Martin Redrado has been monitoring the Latin American economic and political scenario. From his seat at the global financial institution, he has witnessed economic downturn, a fall in commodity prices and a variety of political changes.

He suggests that, “we have been highly complacent with the solid cycle of raw materials”; a cycle that has brought about significant growth, but in which leaders have forgotten to implement policies to improve productivity and competitiveness or the structural reforms that could enhance the position of this part of the continent on the global stage.

“The region is very volatile and is more exposed to events relating to the price of raw materials than to those stemming from internal policies. And furthermore, apart from Chile, we have failed to take advantage by implementing anti-fiscal cycle policies and of saving in the good times. But let’s not generalize about South America; every single country has its own particularities”.

– Regarding general issues, do you see a change occurring in the price cycle of industrial commodities like copper or oil?

– Oil follows a different logic to other commodities. The oversupply that exists in the market (the world is currently producing 96 million barrels a day and consumption is 91 million) is reducing margins, and the price war that was raging between the United States and the OPEC producers has, seemingly, come to an end.  Therefore, we can say that the price has bottomed out, but I do not envisage a particularly sharp rise. The remaining commodities depend heavily on China and the potential volatility of prices.

– How do you see recovery in China and its impact on copper prices?

– I see it as slow. I do not think the price of copper, or of other industrial commodities, will decline or rise any further. Prices from the past will not return. I do not want to predict long-term copper prices, but I see them as remaining stable for the rest of the year.

– Regarding fiscal matters, how have Latin American countries performed? Do any face fiscal risks?

– Chile has performed well in tax matters but has been on the slide recently following a tax reform that has impacted significantly on investment and potential growth. It has also had previous rules, such as those governing the management of copper, that have been successful, but these have broken down. Brazil and Argentina have performed weakly on the fiscal side, having failed to take advantage of the upside of the cycle and they are now paying the price. Peru and Colombia have pursued highly rational tax policies, continuously seeking balanced budgets and avoiding unnecessary public expenditure. Mexico has followed a reasonable fiscal policy, without anti-cyclical programs, but is now attracting attention with its reforms of the oil and energy sector.

Brazil currently has a deteriorating fiscal policy that is akin to a perfect storm, given its ongoing political, institutional, economic and corruption crisis. As a result, the country is, tax-wise, undoubtedly in a serious situation and faces the possibility of losing its risk rating; the only country in the region facing this threat. The rest of the countries are stable and some, including Argentina, are on the rise.

– What impact can we expect the Brazilian crisis to have on other economies?

– This year, Argentina and Brazil will experience the greatest declines in the region, along with other countries that have particularly close trade links to Brazil. Regarding Argentina, industrial manufacturing exports to Brazil will fall by 18%. But this is not the case with Chile, which has 30 FTAs (Free Trade Agreements) with other countries or regions, which means it is less dependent on Brazil than other nations, such as Argentina, or to a lesser degree, Uruguay and Paraguay.

– The Fed has kept its rates unchanged due to Brexit and general unemployment. Is there are chance that it will raise them again?

– Today I see the US Federal Reserve as far more attentive to what happens in the rest of the world, particularly in China, Europe and the large emerging economies, including Latin America. Records from meetings show that the Fed is frequently discussing the international situation, which it did not do previously. Today, what (Janet) Yellen is saying is “I’m watching Brexit”, so there is greater caution. A hike in its interest rates does not only impact the emerging world, but also the rate differential with the euro, that has negative rates, and this could lead to an excessive appreciation of the dollar. Therefore, there is a sense of direction at the Federal Reserve, but one which will take place very gradually, meaning that it should not noticeably affect Latin America.

There is greater interdependence between countries today, and no one should think that the US is able to make decisions on its own or that the actions from the rest of the world, in China, Europe or those relating to the oil industry, have no impact on the US. It should be realized that the United States is clearly primus inter pares, but that there are no hegemonic powers in the world today.


– It would appear that the region is turning back to the right… Argentina, Peru, Temer in Brazil…

– I would not say that it is turning to the right. (Pedro Pablo) Kuczynski, the Peruvian President, is not the same as he was five years ago. He has changed and has a far more inclusive social outlook, and he will not only be thinking about the free market but also in creating greater social mobility in Peru.

In Latin America, people are tired of government authorities for having failed to provide the answers society is looking for; rather than parties winning elections, it is often that governments lose them. Increasingly empowered citizens are looking to politicians to offer concrete solutions to their day-to-day problems, such as schools, hospitals, security and energy, and whoever provides these, whether from the political left or right, will succeed in winning their support.

– How do you see things in Argentina?

– Six months into the new government and President Mauricio Macri is trying, after years of abnormality, to lead the country towards normality in terms of the economy, politics, institutions and international relations. The most significant progress achieved in this period is in international relations, with Macri having restored Argentina as a trustworthy partner. However, his economic policy has been bit by bit. If you ask me what his economic program is, it is to return to normality, but regarding the fiscal and monetary targets, I would have to say that there are few and they are blurred. He is showing a willingness to have a primary deficit of 4.3% of GDP, although measures come and go and it is unknown whether this goal will be achieved. He also plans to oversee a balanced budget in 2019, but he needs to explain how this will be realised. He has moved from an economy based on consumption and wants to create one based on investment and at the moment there is no consumption and no investment. And this year, consumption will lead the decline as a result of the hike in electricity, gas and water prices, which has deprived families of their disposal incomes. In my team, we project a fall in private consumption of almost 3% and this will pull GDP down.

– And can this scenario be avoided?

– With a comprehensive economic program, with specific public expenditure and taxation targets, yes. Work is required on three levels: consumption, which must stop falling; investment, with the provision of new opportunities; and foreign trade, with Argentina emerging from isolation and signing trade agreements. Opportunities are being lost by having higher tariffs than its competitors.

– Regarding Chile, do you think the cases of collusion between firms and political corruption are affecting the country’s image?

– Yes, undoubtedly. Chile was an example of transparency and institutionalism that was praised, rightly so, by all parties and it was seen as distinct from the rest of Latin America. Such cases have shaken its credibility, but it is a solid country, with strong institutions and such solidity will not change as a result, but its reputation has certainly been affected. In terms of the extent to which the country has been shaken, it depends on how it moves forward and the measures it takes to ensure that these are only rare occurrences rather than something more systemic.

– And could this affect foreign investment, or lead to a fall in the country’s risk rating?

– Not the risk rating, no. In terms of the perception of Chile in relation to investment, even from national investors, there are efforts underway to search for new opportunities because the investment climate is not the same as it was in the past. If Chileans can see this, so too can foreigners, who closely monitor the actions of local investors. Such events have, however, damaged the good investment climate so prevalent in Chile in the past.

– Regarding the political arena, will the elections in the United States involve some kind of political-economic risk for the region?

– I am surprised that someone with such a xenophobic outlook and contempt for everything south of the Rio Grande has become the Republican Party candidate for president. I do not think he will win, but the political reality itself, Congress, the judiciary, working institutions, will closely follow the events of the electoral campaign. What the campaign may produce is greater uncertainty in the global economy because of the measures he might introduce, having already announced possibly greater protectionism and a review of free trade agreements. And a more protectionist world is one that grows less and produces greater tensions in terms of trade. The logical decision is that Hillary Clinton will win, and then the challenge will be to try to unite a considerably divided United States.

The lack of productivity

The former President of the Central Bank of Argentina has visited Chile as part of the international seminar, Emerging Countries: The challenge of Improving, organized by Principal Financial Group, AmCham Chile and Cuprum AFP.

Accordingly, he stated that one particular challenge is social inclusion. “We are still a highly unequal continent according to the Gini coefficient, in which the richest 10% earn 26% or 27% more than the poorest 10%. Productivity cannot improve if marginalization continues. Therefore, this agenda must point to social inclusion, with investment in the first years of children’s lives, including health, nutrition and education”.

He also stated that, “we have been complacent” and that there was a lack of major infrastructure development projects, in energy, ports, logistics and transportation, and that multilateral organizations had been ignored in terms of accessing the necessary credit to take things forward.

A lack of effective and permanent training policies for workers has also been a problem. Furthermore, there has been a lack of investment in research and development, “on average Latin American countries invest 0.5% of their GDP (in R&D), while the figure for Chile is 0.39%, which is very low. Developed countries invest 1.5%”.